Storm clouds gather over Indian economy
* Country’s prized
investment-grade-rating at risk
* ‘Policy paralysis is unlikely to
change substantially’
India: India's economic star is fading fast as a spluttering economy
and reform paralysis put the country's prized investment-grade rating at
risk and spook foreign investors. The latest bad news came Wednesday
when Standard & Poor's cut India's credit outlook to negative, saying
the nation's investment grade rating faced a one-in-three chance of
being downgraded to junk. It isolated “political gridlock” as a key
factor behind the warning.
But with Premier Manmohan Singh's unruly coalition hobbled by graft
scandals and infighting, analysts are deeply sceptical the Congress-led
government can set the economy to rights. Nobody should “hold their
breath for a born-again government,” said Rajeev Malik, economist at
CLSA Asia-Pacific Markets.
“Coming from the most conservative of the rating agencies, it's a
wake-up call for the government to do something meaningful soon,” he
said of the S&P announcement. But given government “policy paralysis”,
the situation “is unlikely to change substantially”, he added. In 2007
S&P raised India's credit rating to BBB-, the lowest investment grade, a
landmark that allowed the country to tap new sources of capital by
clearing the way for global funds to invest in New Delhi's debt.
But now “there's at least a one-in-three chance we may move the
rating down in the next 24 months” if “growth prospects diminish” or
reforms remain stalled, said S&P credit analyst Takahira Ogawa. Growth
in Asian rival China is also slowing but ratings agencies have kept
their outlook on Beijing's A ratings positive thanks to its strong
fiscal position. Investors have been waiting for India to reduce the
role of the state, ease red tape on business and open its doors wider to
foreign investment. But elections are due within two years and Kotak
Mahindra Bank economist Indranil Pan said that “given the political
scenario, any big-ticket reforms will be difficult”.
Stubborn inflation is also likely to keep interest rates high,
weighing on growth. A sovereign credit downgrade to junk status -- which
means a higher default risk -- would force India to pay higher interest
rates on international borrowings and discourage foreign investment
urgently needed to upgrade its shabby roads, ports and other
infrastructure. Until recently, the country of 1.2 billion people was a
must-have in foreign investor portfolios. But interest has waned with
investors jittery about graft and policy U-turns, as well as
infrastructure bottlenecks and slowing growth. The economy grew by 6.9
percent in the last fiscal year, the second slowest pace in a decade,
while the fiscal deficit was a record 5.9 percent of gross domestic
product and the trade deficit was up by 57 percent. New plans to impose
capital gains tax liabilities for foreign firms have also disheartened
investors.
The new US ambassador to India, Nancy Powell, told a business
audience in New Delhi on Friday curbs on foreign investment and other
policies had caused “significant concern and dampen sentiment about
India's investment climate”.
AFP |